Inflation, output, and welfare

Ricardo Lagos () and Guillaume Rocheteau ()

No 407, Working Paper from Federal Reserve Bank of Cleveland

Abstract: This paper studies the effects of anticipated inflation on aggregate output and welfare within a search-theoretic framework. We allow money-holders to choose the intensities with which they search for trading partners, so inflation affects the frequency of trade as well as the quantity of output produced in each trade. We consider the standard pricing mechanism for search models, i.e., ex-post bargaining, as well as a notion of competitive pricing. If prices are bargained over, the equilibrium is generically inefficient and an increase in inflation reduces buyers’ search intensities, output, and welfare. If prices are posted and buyers can direct their search, search intensities are increasing with inflation for low inflation rates and decreasing for high inflation rates. The Friedman rule achieves the first best allocation and inflation always reduces welfare even though it can have a positive effect on output for low inflation rates.

Keywords: Inflation; (Finance) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2004
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Related works:
Working Paper: Inflation, output and welfare (2004)
Journal Article: INFLATION, OUTPUT, AND WELFARE (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:fip:fedcwp:0407

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